Global Liquidity Watch: Weekly Update
Record Collateral Multiplier vs. Stalled Base Money
Global liquidity rose above US$196tr last week, driven by favourable funding conditions. The collateral multiplier is at an all-time high according to our records. Investor risk appetite remains elevated, but capital is rotating from emerging markets toward developed markets and commodity-producing regions
Latest flash estimates show Global Liquidity growth picking up and levels at a new high of US$196.2tr, up from the previous week’s US$195.8tr. The disconnect between headline liquidity and underlying liquidity continues. The key is favourable funding conditions. These have lifted 3m annualized growth to 4.3% and annual growth to 6.1%. In contrast the Shadow Monetary Base has slipped lower to US$109.2tr.
Summary of Changes
Liquidity was supported last week by:
- Ongoing contained bond volatility
- Stable/firmer US and UK bond values
But constrained by:
- Firmer US dollar (Yuan apart)
- Weaker collateral values (US and UK apart)
- Slowing PBoC liquidity growth
It continues to be held in check by:
- Generally weak Central Bank liquidity growth
The next chart plots annual and 3m annualized growth rates based on “flash” estimates.
- 3m annualised growth, a measure of near-term momentum, rose to 4.3%
- Annual growth (medium-term momentum) edged higher to 6.1%
- Growth has strengthened but it remains slower than the +15% 3m ann. and +8% YoY rates recorded mid-Summer
Shadow Monetary Base (SMB)
The SMB, comprising Central Bank liquidity and collateral (bonds), is the cornerstone of global liquidity
- The SMB slipped to US$109.2tr last week, down from the previous week’s US$109.4tr
- For comparison, it peaked at +US$112tr in February and has averaged US$110tr YTD
- 3m annualized growth (near-term momentum) slowed to -2.6% and annual growth slipped to -0.4%
- The data continue to confirm that underlying liquidity creation has stalled
Collateral Multiplier
The collateral multiplier—highly sensitive to bond market volatility—is another key liquidity lever. Falling volatility reduces haircuts on collateral, thereby boosting the multiplier, while rising volatility depresses the multiplier.
Volatility ↓ → Haircuts ↓ → Multiplier ↑ → Liquidity ↑
- The MOVE index, a measure of bond market volatility, hit 84 ahead of the FOMC meeting but returned to 76 post the meeting
- The 70-80 range recorded since April remains intact
- Typically, geopolitical and economic uncertainty lead to higher volatility, viz. the MOVE has averaged circa 100 since 2022. Volatility suppression through US Treasury purchases of long-term debt has underpinned global liquidity levels in recent months. Our history of the collateral multiplier going back to 2010 puts the CM at an all-time high.
Currency Moves
A strong US dollar is negative for global liquidity conditions, and vice versa. The dollar firmed against all major currencies this week, apart from the Yuan.
Key cross-rates:
- US$1.335/£ (US$1.353/£ 11th September)
- US$1.149/€ (US$1.162/€)
- ¥155.8/US$ (¥153.5/US$)
- RMB6.709/US$ (RMB6.709/US$)
*\ Monthly data (full) are based on data for all 90 countries that we cover. They comprise Central Bank and private sector liquidity. These values can be restated due to seasonal adjustments and revisions to underlying data.**
*\\ Weekly data (flash) are an intra-month estimate of the monthly data. They are based on Central Bank data for the major five CBs: US Federal Reserve, People's Bank of China, ECB, Bank of Japan and Bank of England; G7 plus China high-grade collateral values; and a collateral multiplier and bond market volatility.*
Source: GL Indexes, US Federal Reserve, People’s Bank of China, ECB, Bank of Japan, Bank of England
There is a strong correlation between Global Liquidity and the performance of risk assets, measured for example by the MSCI World Index. Historical data shows that changes in liquidity frequently lead changes in risk asset prices, with a roughly three-month lag. Specifically, increases in global liquidity tend to be followed by positive performance in risk assets, while decreases in liquidity tend to precede periods of weaker risk asset performance.
Q1 / Q2
A US$2.5 trillion liquidity expansion in Q1 fuelled a powerful 13% rebound in risk asset prices (measured by the MSCI World) in Q2
Q2 / Q3
Global liquidity continued to expand in Q2 but it peaked in May as the positive tailwinds of low market volatility and firm collateral values, together with PBoC liquidity injections met the negative headwinds of generally weak global Central Bank liquidity growth, a stronger dollar, and rising real-economy demand for liquidity
This has limited asset price gains in Q3. The MSCI World index is up just 2% so far this quarter
Q3 / Q4?
Global liquidity levels have continued to rise through Q3 but both near- and medium-term growth measures show that momentum has slowed
We are in the late-stage “Speculation” phase of the liquidity cycle. This calls for a more selective investment approach
Gold and Bitcoin are also sensitive to fluctuations in Global Liquidity, often described as monetary inflation, with a lag of approximately three months. These assets tend to perform positively when liquidity expands and lose momentum or correct when liquidity contracts. In particular, Fed liquidity drives Bitcoin, while PBoC liquidity drives gold
Bitcoin
Q1 / Q2
Federal Reserve liquidity expanded in Q1 and propelled Bitcoin prices to circa US$80,000 by mid-May
Q2 / Q3
Fed liquidity stalled in Q2 and Bitcoin prices responded by falling to circa US$60,000. They have since recovered and are currently hovering around US$85,000. That said, they are still way below the near-US$125,000 recorded last October
Q3 / Q4?
Fed liquidity has weakened through this quarter
Gold
Q1 / Q2
Profit-taking and dollar strength combined with stalled PBoC liquidity injections in Q1 to drive prices lower in Q2. Gold prices fell back to circa US$4,000 in Q2
Q2 / Q3
PBoC liquidity stabilised in Q2. Gold prices rose to US$4,700 in August but have recently settled around US$4,300
Q3 / Q4?
PBoC has resumed liquidity injections in Q3
See our latest post China, Gold and Crypto published 13th September
The next three charts plot our investor exposure indicators. These compare holdings of risk assets to holdings of safe assets in global portfolios. (A positive value denotes that investors are “risk on” and a negative value “risk off”)
- Global risk exposure (+38) remains very high but a gentle rebalancing seems to be underway
- Drilling down, a rotation away from Emerging (+40) and towards Developed (+29) markets started around April time
Within EM, investors have recently been reducing exposure to Asia (+56) and increasing holdings in Middle East/Africa (+36) and Latin America (+21). This shift in favour of commodity producers is consistent with the current Speculation phase of the Liquidity Cycle
At the country level, investors have been reducing exposure to China (+36) and Japan (+51) and reallocating funds to the Eurozone (+23) and US (+18)
Within the Eurozone, exposure to Germany (+25) and Italy (+23) has been picking up but France (-24) is heading lower. The UK too (+3)
The information is provided for information purposes only and on the basis that it will not be relied upon. No information contained herein constitutes a personal recommendation or investment advice.
The information (including any expressions of opinion or forecast) have been obtained from, or is based on, sources believed by the author to be reliable, but are not guaranteed as to their accuracy or completeness and should not be relied upon. The information is provided without obligation on the part of the author and on the understanding that any person who acts upon it or changes his investment position in reliance on it does so entirely at his own risk. The information does not constitute an offer to buy or sell or an invitation to make an offer to buy or sell any financial instrument.
Information is current only as at the date it is first posted and may no longer be true or complete when viewed by you. All information may be changed or amended without prior notice.
No representation, warranty or undertaking is given as to the accuracy or completeness of the information by the author and no liability is accepted by the author for the accuracy or completeness of such information. In no event will the author be liable to any person for any direct, indirect, special, or consequential damages arising out of any use of the information, including, without limitation, any lost profits.
You should be aware that the Internet is not a completely reliable transmission medium. The author does not accept any liability for any data transmission errors such as data loss or damage or alteration of any kind, including, but not limited to any direct, indirect or consequential damage, arising out of the use of the product or services referred to herein.
The materials provided here including text, photographs and other images, are protected by copyright and/or other intellectual property rights. All copyright (and any other intellectual property rights) in these materials is either owned by the author, or is used by the author under licence.
The PDF contains 14 pages, and all pages are represented in the reading page as article text, charts, the data table, or the source disclosure. The PDF does not identify an individual author or print figure numbers; figure numbering follows the order of the ten source visuals.